Friday, September 17, 2010

Does the new healthcare reform reduce rising income/wealth inequality? It's an important question, as those without healthcare coverage are legion in the U.S.

Healthcare is a type of income; if you have any doubts about this, please try buying health insurance in America as an individual. (My wife and I are self-employed so we pay our own insurance in full). If some agency suddenly appeared to pay our (stripped-down, bare-bones) health insurance, we'd instantly get an $11,000 "raise" in our disposable income--an immediate 20+% increase.

But the question raises another: is government-mandated/subsidized healthcare the appropriate policy "attack" on inequality, or is it just another costly boondoggle which ends up burdening taxpayers to benefit the cartels which profit from the current cartel-State healthcare system (which I call "sickcare")?

A recent New York Times article, In Health Bill, Obama Attacks Wealth Inequalitysuggested that the recently passed healthcare reform bill is the latest in a long line of Federal government programs which offer broad insurance against poverty and narrow the inequality between America's haves and have-nots.

From this perspective, healthcare reform is a direct descendent of the Social Security and Medicare entitlements, which are funded by taxes on all wage earners.

To answer whether healthcare reform is truly an attack or income inequality or not, we need to establish some broad contexts, and ask some preliminary questions.

The nation's financial wealth is also highly concentrated, as the top 20% of households own 93% of total financial assets (that is, assets other than real estate, vehicles, etc.)

But before we conclude that the obvious "fix" to our high healthcare costs is to "tax the rich," we should note that the top 20% of households already pay the lion's share of Federal taxes. According to the Congressional Budget Office (CBO), the top 20% paid 86.3% of all Federal income taxes, 43.6% of Social Security, 87.8% of corporate taxes and 34.1% of Federal excise taxes.

After including earned-income tax credits, the bottom 60% of households paid less than 1% of all Federal income taxes, and the households between 60% and 80% paid 13%.

The top 20% paid 68.7% of all Federal taxes: Income taxes, Social Security and Medicare, excise and corporate taxes.

The top 10% of households paid fully 72.7% of all Federal income tax, the top 5% paid 60.7%, and the top 1% paid 38.8%.

The healthcare reform bill adds a special payroll tax to those households earning more than $250,000 annually--more or less the top 5% who already pay over 60% of all Federal income taxes.

Should the top 10% pay more tax? Since much of the additional costs of the healthcare reform bill are to be funded by this new tax, then the bill's answer is an unequivocal "yes."

But the key word here is "payroll": this new healthcare tax is on earned income--wages, salaries and bonuses—while the income of the truly wealthy comes from "unearned" investment income: rents, interest from tax-free municipal bonds, dividends, etc.

As a result, the new healthcare tax hits high-income workers but appears to leave the super-rich untouched.

This raises the troubling possibility that perhaps the tax isn't really narrowing the nation's wealth inequality as much as its backers hope.

There are several other tax-related issues in the healthcare reform bill which sound good on the surface but which may not hold up to deeper scrutiny.

Another reform bill tax being levied is a 2.3% tax on medical devices and equipment. The intent is that the medical-technology industries which stand to benefit should help pay for the program, but excise taxes tend to be passed on to the consumer.

One of the key ways that the reform bill extends coverage to the uninsured is by expanding Medicaid coverage. Medicaid is the Federal program which offers healthcare to low-income households, especially those with children.

The Medicaid program is partially paid for by the states, and so states are facing big bills for this expanded Medicaid coverage. While the Federal government will pony up the full costs for the first two years of this expansion, after that, states will have to pay.California, for example, will have to come up with $2 to $3 billion more per year for Medicaid, even as the state faces a chronic $20 billion shortfall.

In other words, while Congressional backers of the legislation predict the bill will cut Federal deficits, these reductions may come at the states' expense.

Who will pay these billions in new state taxes? That will be up to each state, but it may not be only the very wealthy. So once again, the notion that the bill narrows income disparity is questionable.

Perhaps most importantly, the bill's total cost may be wildly underestimated. If so, then the "tax the rich" payroll surcharge may not cover much of the bill's real costs, and all taxpayers would end of footing the bill, either directly through higher taxes or indirectly, through higher Federal borrowing which would lead to higher interest payments on the Federal deficit.

One of the reform bill's key elements is a set of penalties on businesses and individuals that do not buy health insurance. The idea is to create incentives for businesses to provide healthcare via 35% tax credits and create disincentives by charging businesses $2,000 per employee if the firm does not provide coverage.

Non-partisan analysis of these measures suggest that businesses would benefit from canceling their $10,000-per-employee coverage and paying the $2,000 penalty. The government would then subsidize the employee's own insurance by $8,000.

For businesses that are losing money or breaking even, the tax credit doesn't offer much incentive, as they owe no tax to be offset with a credit.

Individuals who do not buy insurance would be penalized about $600 per year (or 2.5% of income up to a certain level). But since the reform bill bans insurance providers from refusing coverage for pre-existing conditions, then healthy workers would do better financially by paying the modest penalty and saving the thousands of dollars insurance costs annually.

The net results of these perverse incentives to "game the system" are unknown, but if small businesses and healthy individuals opt out of buying insurance, then that defeats the entire premise of spreading the risks over businesses and the healthy populace.

It doesn't take a math genius to see that saving $8,000 a year per employee is a powerful incentive, or to see that if the government picks up that $8,000 annual subsidy tab for millions of workers, the program's proposed savings will turn into cost over-runs. The payroll surcharge on the top 10% households would have to rise even higher to cover these additional costs, or be spread over all taxpayers.

Does this healthcare reform bill really attack inequality? One context which receives little attention but plenty of lip-service is that the U.S. spent 17.6% of its gross domestic product on health care in 2009, more than double the percentages spent by Japan, Britain, Spain, Italy or Australia, even as our overall health trails that of other developed nations.

In effect, the extra 8% of GDP we devote to healthcare acts as a "tax" on the entire economy, as we're paying this $1.2 trillion but ending up with lower health than nations which spend half of what we do.

If the causes of our outsized costs are structural, then we as a nation would be better served by focusing on reducing our healthcare expenditures to align with the costs of the rest of the developed world, rather than seek to pay for our exorbitantly costly, cartel-State-crony-capitalist system with higher taxes and slight-of-hand accounting.

But that will require taking control of the system away from the corporate cartels which "own" the machinery of Federal governance, and I suspect that only systemic financial insolvency will enable such a transformation.

I am slowly catching up on correspondence after 15 days away from my desk --your patience is appreciated.

If you would like to post a comment where others can read it, please go toDailyJava.net, (registering only takes a moment), select Of Two Minds-Charles Smith, and then go to The daily topic. To see other readers recent comments, go to New Posts.

Terms of Service

All content on this blog is provided by Trewe LLC for informational purposes only. The owner of this blog makes no representations as to the accuracy or completeness of any information on this site or found by following any link on this site. The owner will not be liable for any errors or omissions in this information nor for the availability of this information. The owner will not be liable for any losses, injuries, or damages from the display or use of this information. These terms and conditions of use are subject to change at anytime and without notice.

Our Privacy Policy:Correspondents' email is strictly confidential. The third-party advertising placed by Adsense, Investing Channel and/or other ad networks may collect information for ad targeting. Links for commercial sites are paid advertisements. Blog links on the site are posted at my discretion.

Our Commission Policy:Though I earn a small commission on Amazon.com books and gift certificates purchased via links on my site, I receive no fees or compensation for any other non-advertising links or content posted on my site.

Weekly Musings Reports

"What makes you a channel worth paying for? It's actually pretty simple - you possess a clarity of thought that most of us can only dream of, and a perspective that allows you to focus on the truth with laser-like precision." Jim S.

The "unsubscribe" link is for when you find the usual drivel here insufferable.

Contribute via PayPal

Why I gratefully accept donations and why you might want to donate:

A 95-minute movie with 10 minutes of ads and a small popcorn costs $25.
If you enjoyed this site for at least 2 hours this year, and you donate $25, you already received more entertainment than you did from the movie. The other 100+ hours of enjoyment you receive here is FREE.

Subscribers and donors of $50 or more this year will receive exclusive weekly Musings Reports.

You have the immense moral satisfaction of aiding a poor dumb writer who seeks to inform, entertain and amuse you.

Contribute via Dwolla

Dwolla members can now subscribe to the weekly Musings Reports with a one-time
$50 payment; please email me,
as Dwolla does not provide me with your email: